Question

Question 2: Company A is considering two options with the following data: Option I: Unit Sales Revenue: $18 Unit Sales Revenue: $18 Unit Variable Cost : $16 Total Fix Cost: $2.000.000 Total Fix Cost: $ 6.000.000 |Alternative II Unit Variable Cost : $14 Required: a) At what sales volume Company A is indifferent between two alternatives? Explain which alternative is better b What is the Break Even Point (BEP) for Option I?

Answer 1

1 Answer :- Difference between two things is represented by delta A. Option-1 Unit sales Revenue = - Unit v.c. = Contribution per Unit = $18. $16 18-16= $2. Alternative - II Sales Revenue = V. Cost = contribution = $18 per unit $ 14 PU $4 per unit A Contribution Fixed cost = 4-2 - $2 per unit = 60000m - 2000000 $ 400000 Indifference point between DF. Cost 2 Alternatives A contribution Looondo 200m If sales is more than 2000000 Unit, they alternative II is better because it has higher contribution per unit. At "Indifference point (2000 ord units) Bed cost both the options has same profit, but as sales exceeds the Indifferent point, Alt. I will be more profitable as it will give Contribution of $4 p. unit If sales is below 200000 Units, they option I is more viable, because of Lower fixed cost.

los Break even point = fixed cost Contrubution punit 2000000 = 1000000 units Break even point is a point of sales where Company makes no profit, no loss.